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What is IPO listing and what happens once IPO is listed in secondary market?

12 Jan 2023 0 COMMENT

An Initial Public Offer (IPO) is a trending investment option for people looking to be a part of a company with high growth potential. Many investors subscribe and invest in IPOs, hoping to find the next multi-bagger or benefit from the listing gains. IPO investments offer many benefits, but an investor should remain informed about the various aspects and benefits of investing in an IPO.

What is IPO listing?

IPO is a method of equity financing that private companies use. Through the IPO process, a private company offers its equity shares to the public for the first time. This means that a company raises funds by selling its ownership stake to the general public. The company then utilizes the funds raised through IPO for various purposes like scaling the business, financing new projects or repaying debts.

On successful completion of the IPO process, a private company becomes a public limited company. The IPO listing allows a company’s shares to be traded on the stock exchanges.

How is a company affected by an IPO?

Now that we’ve understood what is IPO listing, let’s take a look at how the company get impacted after launching an IPO.

Ability to raise funds

An IPO is a great way for a company to raise cheap funds. When a company needs to scale and grow, it might need a large amount of money. It is difficult to get large sums through banks or financial institutions. Moreover, debt capital comes with interest costs and certain conditions. In contrast, a company raises equity capital through IPOs, which do not bear any interest costs.

Costs

IPOs have many associated costs attached to them. During the IPO listing process, a company will have to bear administrative costs, transaction costs, underwriter fees etc. A company also has to spend money to advertise the IPO and lure investors into subscribing to the issue.

Equity dilution

When a company opts for an IPO, the overall equity of the original shareholders is diluted to some extent. When an investor makes an IPO investment, they become a shareholder of the company. This gives them a stake in the company.

Better public image

A company usually benefits from an IPO as it creates a positive public image in the eyes of investors. In order to be listed on the stock exchanges, a company has to be transparent and accountable to the investors and regulators. Moreover, listed companies need to meet the eligibility criteria.

IPO Listing Eligibility

In order to be eligible for an IPO listing, a company has to meet certain criteria set by SEBI.

  • The paid-up capital should be greater than Rs 10 crore
  • The total capitalization of equity should not be lesser than Rs 25 crore

A company should also adhere to the rules and laws of the:

  • Securities and Exchange Board of India Act, 1992
  • Securities Contracts (Regulations) Act of 1956
  • Companies Act 1956/2013

The issuing company also needs to provide a three-year record of either the promoters of the company, the converted partnership firm or the applicant that has applied for the IPO listing.

Benefits of IPO

IPO investments offer multiple benefits to an investor. Check out some of these:

Be an early investor

One of the major benefits of an IPO is the possibility to invest in a company at the early stages of its growth cycle. Investors can apply for IPOs of companies that they believe have a solid potential for growth in the future.

Better transparency

Investing in an IPO is helpful because the companies that are listed on the stock exchange need to be transparent and accountable. The companies need to regularly declare and provide the investors with information like the financial reports, investments of the company and the shareholding pattern. Investing in regulated security is safer for investors.

Listing gains

IPO investments can also be a good way to realize profits in a short term. When the demand for an IPO is high, it lists on the stock exchanges at a premium. At times these premiums provide a substantial return to the investors.

Shareholder rights

After the IPO listing process, the investors that are allotted shares become the shareholders or part owners of the company. This gives them voting rights on matters related to the company’s business. The shareholders are also entitled to receive dividends from the profits that the company makes.

IPOs are a really useful tool for both – businesses and investors. Although IPOs offer many benefits to investors, not all IPOs perform equally after listing on the stock exchanges. Therefore, it is advised that an investor does thorough research into the company, its management and its business model before investing in an IPO.

FAQs

What is IPO Secondary Market?

When a company launches an IPO, it is in the primary market. After the IPO process is over, the shares of the company are traded in the secondary market.

What happens to the stock price after secondary offering?

Usually, a secondary offering has a negative effect on the stock price as the issuing of additional shares hurts investors’ sentiment and confidence.

How do you buy an IPO in the secondary market?

After the IPO process is completed, the shares are listed on the stock exchange. One can buy or sell these shares similarly to other listed shares on the stock exchange.

How does a secondary listing work?

A secondary listing is a process through which a company’s shares are listed on an exchange other than the primary exchange where the shares of the company are listed. A company has to meet the capital requirements and other conditions in order to list its shares on another exchange.

Disclaimer: ICICI Securities Ltd. (I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is a Member of National Stock Exchange of India Ltd (Member Code :07730), BSE Ltd (Member Code :103) and Member of Multi Commodity Exchange of India Ltd. (Member Code: 56250) and having SEBI registration no. INZ000183631. Name of the Compliance officer (broking): Ms. Mamta Shetty, Contact number: 022-40701022, E-mail address: complianceofficer@icicisecurities.com. Investments in securities markets are subject to market risks, read all the related documents carefully before investing. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein above are solely for informational purpose and may not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments or any other product. Investors should consult their financial advisers whether the product is suitable for them before taking any decision. The contents herein mentioned are solely for informational and educational purpose.